Herbalife finds errors with new members metric

AustenHufford

Herbalife Ltd., the nutritional-products company that has faced questions about its business model, said Thursday that it had misstated an important member growth metric 28 times over three earnings calls since last year.

According to the company, database scripting errors lead it to misreport the number of active new members, a new metric that it first mentioned on an call with analysts and investors in August.

Herbalife overstated the metric's growth 14 times and understated it 12 times. Typically, Herbalife overstated the metric by higher amounts. When overstating, Herbalife overstated by an average of 20.5 percentage points; and when understating, it understated by an average of 3.2 percentage points.

Two of the 28 mistakes reflected incorrect time periods.

Herbalife shares fell 7.2% to $52.34 in morning trading in New York. The stock, before Thursday, had risen 85% over the past year.

Founded in 1980, Herbalife sells protein shakes, snacks and other weight-management products, along with other dietary and nutritional supplements, through a global network of independent distributors.

Herbalife, based in the Cayman Islands, has been locked in a legal battle with billionaire investor William Ackman, who has accused the company of being a pyramid scheme. Herbalife has denied the accusations and, in turn, accused Mr. Ackman and his hedge fund of trying to manipulate Herbalife's stock.

Representatives of Mr. Ackman declined to comment Thursday.

Metrics related to membership growth are closely watched because Herbalife generates much of its sales from members, either directly or when they act as independent distributors to consumers.

Earnings conference calls are how many investors glean more detailed information directly from company executives. The metric was misstated on calls in August, November and last month. Herbalife said the misstated metric wasn't included on any periodic reports filed with the Securities and Exchange Commission, and that the errors had no impact on its financial statements.

The company said it had both understated and overstated the metric's growth due to the error.

For example, on a Feb. 25 call, the company said world-wide active new members' excluding China rose 16.7% in the fourth quarter. On Thursday, the company corrected the increase to 3.2%.

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